Did you know that small changes can lead to huge improvements over time? For instance, dedicating 1% more of your time to marketing initiatives every day will lead to significant progress over the course of a year. It sounds simple enough, but how do you put this idea to the test? 🤔The answer lies in your budgeting practices.
Incremental budgeting is a method where you make incremental changes to your current budget to inform future allocations. These incremental changes include adjustments for inflation, sales prices, or software tools. If you’re looking for a simple budgeting method to help you achieve financial consistency, incremental budgeting might be right for you.
IN THIS ARTICLE:
We want to help improve your business's success, which is why we put together an entire series about the top business budgeting methods to give you complete control over your finances. If you’re ready to get serious about budgeting, let’s dive 🏊 into the basics of incremental budgeting to determine if it’s right for your business.
What is incremental budgeting?
Incremental budgeting is a method where you prepare a new budget by making small changes to your current budget amounts for a given period. This method is one of the most commonly used, as it’s simple and can be utilized for a variety of different budgets (🧠 think departmental budgets, project budgets, and payroll).
It’s based on the idea that a new budget can become better by making only marginal changes to the current allocations. But let’s take a second to consider other scenarios where this same idea is at play.
Think back to when you learned how to ride a bike. Did you learn how to balance, pedal, and come to a stop all in one day? Of course not! You took days, weeks, and maybe even months of making small improvements to become a cycling whiz. 🚴 This is the same concept used for incremental budgeting.
Incremental budgeting is achieved by starting with your historical allocations as a baseline and making minor adjustments until your new budget is complete. Then, assumptions are added or subtracted from the original amounts to determine the new budget.
Incremental vs. zero-based budgeting
Zero-based budgeting is a method where you must explain all earnings and expenses for each fiscal period. So, how does this differ from incremental budgeting? The answer is straightforward, actually.
While incremental budgeting starts with your current budget and makes adjustments to the existing numbers, zero-based budgeting starts with a completely clean slate for each period, without making any reference to previous budget years. With zero-based budgeting, you start from scratch to allocate budgeting needs. As you can see, incremental budgeting is much quicker and often simpler than zero-based budgeting.
Incremental budgeting steps
One of the most noteworthy advantages of incremental budgeting is that it’s less difficult—not to mention less time-consuming—because your fixed expenses have already been budgeted.
Fixed expenses may include:
🏦 Business loan payments
So when it comes to building an incremental budget, all you’ll need to do is follow a couple of simple steps. These steps include understanding, adjusting and forecasting your fixed expenses.
Step 1. Adjust
The first step in creating any well-executed budget is understanding your finances. 📊
You’ll need to review each line item of your current budget to understand your fixed expenses and make incremental adjustments. You should base these adjustments on factors like inflation, sales prices, cost of goods, or other important aspects that could help improve your bottom dollar. Your resources will ultimately be adjusted up or down depending on the factors at play.
Continue this step until you’ve adjusted all line items on your current budget.
Step 2. Forecast
Once you’ve adjusted all fixed expenses, you’ll need to forecast your expenses based on the new allocations. You can do this by using the incremental budgeting formula: (new expense [-] [+] old expense = budget change). 🤓📚
Add or subtract the adjusted expenses from the old ones to show the change in budget for the upcoming fiscal year. It’s pretty simple, though it never seems that simple when you sit down to do it. Your new budget will largely be similar to your old one, with minor cost differences.
Incremental budgeting example
Let’s walk through an example of incremental budgeting in action to give you a better understanding.
For example: You’re working on a new payroll budget for the upcoming fiscal year. You look at your current budget to base next year’s allocations on and make changes based on new hire support and inflation.
Current Payroll Budget
New Payroll Budget
Human Resources: $25,000
Human Resources: $30,000
After making small adjustments to allocations, your new payroll budget is complete! Naturally, your new budget is bigger this year because of inflation and payroll changes. Thankfully, you’ve outlined these payroll adjustments ahead of time to prevent cash flow roadblocks. 🚧
Pros and cons of incremental budgeting
While one of the most simple budgeting methods, incremental budgeting is also one of the most controversial practices to follow. This is because many believe it can cause unnecessary spending.
That said, there are many advantages of using the incremental budgeting method. From its simplicity to its consistency, it can offer a lot of benefits for the right business. Here are some of the top incremental budgeting advantages and disadvantages.
Incremental budgeting pros: 👍
Uses your current budget to save time.
Requires only simple calculations.
Remains fairly consistent over time.
Expenses are easy to predict.
Fewer internal challenges are needed.
Incremental budgeting cons: 👎
Can lead to overspending vs. being conservative with cash fluctuations. 💸
Doesn’t account for unforeseen changes or factors outside of last year’s budget.
Could discourage leadership from looking more in-depth into expenses.
How to stick to your incremental budget
Now comes the hard part; actually sticking to your budget. If we’re being honest, learning how incremental budgets are implemented doesn’t just happen overnight. It takes time to perfect and improve your budgeting practices. While maybe not the most exciting part of being a business owner, it’s all part of the process.
So, how can you stick to your budget once you’ve created it? Here are a few tips to help you stay consistent with your incremental budgeting practices.
Stick to a schedule: The best way to budget effectively is to stick to a schedule. 🗓 Given that the incremental budgeting method depends on the current budget to inform changes, it’s essential to keep your budget up-to-date. Schedule time in your calendar to budget every quarter or, at minimum, yearly.
Review and adjust: Budgets are fluid and can change depending on your goals or financial circumstances. Because your business changes rapidly, continually reviewing and adjusting your budgets where needed is essential. A rule of thumb is that the more frequently you reevaluate budgets, the more accurate they’ll be. You should make adjustments regularly to keep up with industry changes, staff, and the cost of goods. Additionally, you can utilize the digital envelope system to stick to your budget and categorize each type of business expense. This will help you portion your revenue out, ensuring you can’t spend more than what you have.
Utilize money management software: As an entrepreneur, you may feel driven to roll up your sleeves and do the manual work yourself. But, the key to being a successful entrepreneur is to know how to utilize productivity to your advantage. Money management software takes the manual work out of the equation, leaving you to focus on the work that matters most to your business. A banking platform like Relay allows you to categorize your budget, get visibility into your cash flow, and automate your payments. 🚀
Don’t wait to start budgeting. If you’re looking for an online banking and money management platform that helps you perform an incremental budget, try Relay today.
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